Homeownership is a sign of financial security. Owning a property has its ups and downs, but can ultimately lead to pride. Millennials aren’t known for putting down roots, but recent studies show that trends are shifting.
While young people might want to buy homes, lower minimum wages and increased real estate costs pose challenges. At Cher, we’re committed to helping you through the home buying process no matter what stage of life you’re in. Here’s our guide to getting a home loan with no credit.
How is Credit Limit Determined?
Many reputable institutions and banks offer low-interest home loans, but how do they determine a borrower’s worthiness? A borrower’s credit limit is usually determined by income and past repayment history. Some applicants might not have a steady source of income. There are also several loan defaulters who do not adhere to the lender's repayment schedules. Such borrowers are classified as 'high-risk' borrowers. They receive subprime loans, which are loans for high-risk borrowers.
Do you have questions about buying a home? Contact Cher.
What’s a Credit Score?
A credit score is a numerical value assigned to each individual, determining their eligibility for future credit. It gives potential lenders an idea about how likely an applicant is to return the loan. This score guides a bank’s decision when determining whether to disburse a loan to a certain applicant.
Credit scores work on the assumption that if a borrower has paid their bills on time in the past, they’re likely to do so in the future. Several factors go into calculating a person’s credit score and each factor has different weights.
The primary factor is repayment history, which accounts for 35% of the credit score. After which, factors such as credit history length, utilization of one’s credit, and the number of credit lines opened factor in.
All of these factors aggregate to an overall score. One such score is the FICO score.
The Fair Isaac Corporation is a data analytics company operating in the credit scoring domain. They introduced the FICO score, a three-digit credit score on a scale of 300 to 850, the most commonly used metric to assess credit risk. FICO classifies individuals with scores of 670 to 739 as 'good'. A score below 670 risks rejection of an individual's loan application. According to FICO, the 18 to 29 year old demographic has an average FICO score of 652. This indicates that a large portion of millennials has a bad credit score.
If a borrower has no credit score or a bad one, does this mean they have no chance of obtaining a home loan?
Several options are available to obtain high-risk loans for people with bad credit. Mortgage loans under $50,000 are easily obtainable with a bit of luck and the right paperwork.
What are the Options?
FHA Home Loans:
The Federal Housing Administration offers the most popular avenue to obtain a home loan with bad credit. The FHA insures their loans and can afford to be lenient with the minimum requirements. Over 40 million families have been able to finance their home purchases since its introduction in 1934. If an applicant’s score is below 600, this is the best bet for a home loan. Applicants will be expected to come up with a sizeable down payment depending on their credit score. 3.5% equity for a score of 580+ and 10% equity for a score between 500 and 579. The applicant must also prove zero delinquency, steady income, and an acceptable debt-to-income ratio, among other factors.
Other Government Programs:
Depending on the location of the applicant, they can apply for a USDA Rural Development Loan. The USDA wants to encourage real estate sales in the rural parts of the country. 97% of the entire country is eligible under this scheme. Prospective applicants can check the USDA’s website for a full list of localities and proceed to apply for a 100% mortgage loan. Zero down payment is required.
Former veterans of the US Armed Forces can look into VA Home Loans. Zero down payment and low-interest rates make this an appealing choice for seasoned patriots. The VA does not cite a minimum credit score, but most lenders require a FICO score of 620 and above.
If you have more questions about financing a new home, contact Cher.
There are multitudes of lenders who approve loans to applicants with less-than-strong credit scores. Small scale banks, independent mortgage brokers, online lenders, P2P lending companies, credit unions, and private finance firms are a few options. Building a strong relationship with a local lender is essential. If the lender knows the applicant personally, they may be willing to provide the manual underwriting required to process a high-risk loan.
Alternative Credit Data:
A meticulous borrower can establish a pattern of repayment history with paperwork. This process is cumbersome and unreliable, and it depends on the lender’s guidelines. The lender may request several pieces of paperwork spanning at least a year’s time. Payslips, cell phone post-paid bills, landline bills, cable bills, rent, utilities, insurance payments, and school tuition are some of the receipts that can be produced. Experian, a leading credit report agency accepts rent payment slips as proof of credit history. Approach the closest reputable bank or mortgage provider for specific requirements.
Repair Bad Credit:
The harder but more reliable path to securing a home loan would be to repair credit score. Credit scores are updated constantly depending on the person’s income and spending habits. Equifax, Experian, and TransUnion allow an individual to obtain one free credit report per year. Examining the details of this report can help the borrower take the required action.
Increasing the credit score by even 10 to 20 points can largely reduce the mortgage interest rate. Timely bill and rent payment as well as keeping credit utilization rate below 30% are good ways to start building good credit.
A prospective home buyer should analyze their requirements methodically. Is buying a new home really necessary? How can one build and maintain a good credit score? These questions are instrumental in paving the path to a new home. Browse our financial resources and more at Cher to get started.